29 July 2008

Climate Change for Non-Economists

On Wednesday Thursday, I'll be discussing the economics of climate change on a panel at a summer school for mathematics PhD students. I am planning to cover the following topics wrt the social science side of climate change:

Climate change can be addressed by mitigation (trying to affect CC) and adaption (dealing with it). In both cases, physical science and engineering will be effective if the "right" institutions prevail.

Institutions (the rules of the game) can turn good policies into bad outcomes and vice-versa, so its important to get them right if, e.g., we want cap and trade to work.

Prices matter; non-prices matter even more wrt climate change.

Humans are marvelously creative -- if they can repair a plane in mid-flight, they can deal with climate change.

Humans are also unpredictable; just when you think you've got them "captured" in your model, they can change directions. This makes "social dynamic" models particularly unstable.

Please comment on and/or add to this list. I am hoping to expand it into a series of posts ("economics for lawyers and engineers").

I will also try to learn something from the mathematicians, lawyers and engineers :)

Bottom Line: Everyone should know some economics, but conveying such knowledge can be deceptively hard.

7 comments:

Should you start with how humans manage commons-type problems? You know, cooperation, community rules and as technology/demand increase pressure, by private property and more formal institutions (a la Ostrom, or Yandle's "The Commons: Tragedy or Triumph?")?

When addressing informal societal reactions, it makes sense to address the development of mores/taboos and the application of moral suasion - which we increasing see today (and Bob Murphy's blog host Gene Callahan has expressly sanctioned: http://mises.org/Community/blogs/tokyotom/archive/2007/11/04/can-a-free-society-solve-global-warming.aspx), to the angst of those feeling the pressure (see Bret Stephens of WSJ and Lubos Motl at http://mises.org/Community/blogs/tokyotom/archive/2008/07/07/mind-games-bret-stephens-of-the-wall-street-journal-panders-to-quot-skeptics-quot-by-abjuring-science-and-declaring-himself-an-expert-on-quot-mass-neurosis-quot.aspx).

Will you include a discussion of rent-seeking when government is involved?

How about difficulties of bargaining over resource use in the face of information/transaction costs, and when users' wealthy and relative contributions differ, and agreements are difficult to enforce?

You know, TokyoTom, it's about time I penned a response to Gene's essay.

Btw, what's climate change for economists like?

1) Pretend you know more than the entire academic climate science community.2) Cherrypick science that revises down the severity of the impacts of climate change.3) Refute any argument that scientists might be underestimating the severity by offering just your opinion.4) Adamantly reject any attempt whatsoever to establish clear rights in atmospheric resources. Only terrorists support property rights that lead to inconveniences for polluters. You're not a terrorist, are you?5) Along with 4), demand that REAL market solutions involve property rights. They won't notice that you ALSO oppose defining those very same rights!6) Make any system of tradeable caps sound stupid. Don't worry about giving readers misconceptions, that crap doesn't matter here. The point is that tradeable caps are just dumb, except where they aren't.

It seems to me that your points 2-5 are more about "economics" rather than the "economics of climate change". And, I can understand that this may reflect the reality that the audience may not have a basic grounding in economics.

But I think when you look at traditional economic cost-benefit analysis of the "integrated assemssment models" used for modelling climate change - you encounter a number of interrelated problems and boundaries that are almost unique relative to what economics normally has to deal with. E.g. the very long-dated time-frames; the delay in impacts relative to emissions or mitigation; inertia in the system and historical contributions to GHG concentrations; intertemporal equity; "the commons problem" and the infeasibility of assigning "property rights" to a well-mixed atmosphere; limits to substitutability between "future wealth" and basic ecosystem services and resources. And, perhaps the most important issue, limits to "social discounting" under conditions of great uncertainty, and here I am talking specifically about Martin Weitzman's On Modeling and Interpreting the Economics of Catastrophic Climate Change.

If I was attending a lecture on the "economics of climate change", I would like to the see the emphasis on what makes this a difficult and contentious economic problem, not just a review of how economics traditionally deals with any general problem.

I look forward to hearing how you structure the lecture, and maybe even having a look sometime here!

I agree you should get into the issue of discounting, and show how that really matters. At first I was going to say that you shouldn't get into the Weitzman stuff, but then I remembered you said these where PhD math students, so maybe they would like that tangent.

If I were you I would really stress the fact that mitigation is costly, i.e. if we impose a carbon tax or whatever, we are sacrificing current potential consumption in exchange for a more desirable future climate. A lot of outsiders think, "Green jobs! Wind power is more economical anyway. This is a win-win."

Great point, Bob, GREAT point. I just hate when you're trying to present sound economic logic, and then, through NO intent of your own, they draw the wrong impression COMPLETELY.

Like, for example, if you're trying to explain how the gain in price *above a certain point* resulting from a cap on that product's use, doesn't reflect scarcity ... and then reader, somehow just up and leaves with the impression that it's impossible for such a cap to ever reflect scarcity ... that would be a TOTALLY bad thing.

That's why I'm sure you exerted all deliberate effort in keeping that kind of thing from happening.

I don't know that Ph.d. math students would be as interested in this, but perhaps it would be beneficial to frame climate change as an "externality" that has not been paid fo. You are clearly in favor of market-based solutions, so talking about the underpricing of pollution and other things that have led to climate change would be right up your alley.